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  <h1>How to reduce cost</h1>

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  <div id="toc_container">

  <p class="toc_title">Contents</p>
  <ul class="toc_list">
    <li><a href="#question_0">Re-price the contract</a>
    <li><a href="#question_1">Reduce expenses</a>
  <li><a href="#question_2">Reduce claim costs</a>
  <li><a href="#question_3">Others</a>
</ul>
  </div>
  Note: some of the measures can be employed to both new business and existing business,
  and some can only be applied to new business.
  <br>
Consider the following aspects.
<ul>
  <li>
    Expenses
    <ul>
      <li>
        Underwriting cost
      </li>
      <li>
        Claim handling cost
      </li>
      <li>
        Initial commission
      </li>
      <li>
        Marketing, advertising cost.
      </li>
    </ul>
  </li>
  <li>
    Claim costs
    <ul>
      <li>
        Limit, deductible, exclusions
      </li>
      <li>
        more stringent claims control processes
      </li>
      <li>
        Reduce options / guarantees
      </li>
      <li>
        Reduce anti-selection effect
      </li>
    </ul>
  </li>
  <li>
    Others
    <ul>
      <li>
        Profit loading
      </li>
      <li>
        Reinsurance arrangements
      </li>
      <li>
        Investment strategy
      </li>
      <li>
        Tax
      </li>
      <li>
        Regulations
      </li>
    </ul>
  </li>
</ul>


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    <span id="question_0">Re-price the contract</span>
    <div id="content">
      <ul>
        <li>
          Weaken assumptions used in pricing basis. Particularly with regard to claim inception (and termination) rates.
          <br>
          But, increased risk of pricing assumptions not being borne out in practice, which will result in future losses.
        </li>
        <li>
          Reduce profitability loading.
          <br>
          Expectation of increased volumes offsetting reduced profit per case.
          <br>
          But, elasticity of demand may not be accurately understood and, thus, increases in volume may not be as expected.
          <br>
          Also, need to consider competitor response to lowering premiums, which may limit any expected increase in competitiveness.
        </li>
      </ul>
    </div>
  </div>

  <div class="column middle" >
    <span id="question_1">Reduce expenses</span>
    <div id="content">
      Expenses comprise of initial commission, underwriting expenses, claim handling expenses,
      investment management expenses, marketing expenses.
      <ul>
        <li>
          Reduce the underwriting costs. Savings can be passed on to policyholders in the form of lower premiums.
           but it may lead to poorer claim experience, which will negate any reduction in premiums.
        </li>
        <li>
          Implement more stringent underwriting procedures. Should lead to lower claims inception rate and, thus, lower premiums.
          <br>
          But, will increase decline rates and lengthen sales processes.
          <br>
          Also, increased cost of underwriting may outweigh any premium reduction as a result of better risk targeting.
        </li>
        <li>
          Reduce the commission (only for life products). Lower incentive to sale may reduce overall business volumes.
          <br>
          Increase proportion of commission successfully clawed back in event of withdrawal.
          <br>
          May also reduce incentive to sale and any increased administration costs associated with this may outweigh the benefits.
        </li>
        <li>
          Decrease marketing expenditure.
        </li>
        <li>
          Reduce on-going expenses loadings
          <br>
          Streamline processes to increase efficiency.
          <br>
          But, may result in poor customer service and reputational risk.
          <br>
          Cross-subsidise from policies with higher premium rates to those with lower premium rates
          and/or between different distribution channels etc to increase competitiveness.
          <br>
          But, creates risk that mix of business sold is different to that assumed, leading to future losses.
        </li>
        <li>
          Change to a more cost-saving investment strategy. e.g From positive to negative investment strategy.
        </li>
        <li>
          Reduce claim handling expenses, but may lead to higher fraudulent claims.
        </li>
        <li>
          Adopt a clear definition of certain benefits.
        </li>
        <li>
          change distribution channel (to reduce costs or change target market)
        </li>
      </ul>
    </div>
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    <span id="question_2">Reduce claim costs</span>
    <div id="content">
      Decrease cover. But these actions may reduce the marketability of the product, so that
      the reduction in premium rates achieved does not result in increased volumes of business sold.
      <ul>
        <li>
          Apply limit to the sum assured, maximum age, or maximum payment period.
        </li>
        <li>
          Impose deductible, if it is general insurance.
        </li>
        <li>
          Increase exclusion applied and/or introduce longer deferred period.
        </li>
        <li>
          Reduce escalation of claims in payment. (Indexation clause in genaral insurance)
        </li>
        <li>
          Reduce elements of options / guarantees.
          <br>
          Introduce or extend use of reviewable/renewable premiums.
          <br>
          But, such steps are also likely to reduce marketability.
        </li>
        <li>
          Reduce additional cover.
        </li>
      </ul>
      Implement more stringent claims control processes
      <ul>
        <li>
          Decline more claims
        </li>
        <li>
          Review existing claims on a more regular basis
        </li>
        <li>
          Reputational risk and PRE considerations if claims philosophy not in line with policyholders expectations.
          Also, increased costs of new claims control measures will limit any reduction in premium rates.
        </li>
      </ul>
      Reduce anti-selection effect
      <ul>
        <li>
          Target only lower risk business (e.g. with regard to age, sex, occupation) to allow for lower risk margins.
        </li>
        <li>
          Sell product as rider benefit only (e.g. when purchasing a mortgage)
        </li>
        <li>
          Better training of sales teams to identify anti-selection
        </li>
        <li>
          Effect regular policy reviews to identify over-insurance.
        </li>
        <li>
          But, may lead to significant reduction in business volumes and any additional costs incurred will reduce possible premiums reductions.
        </li>
      </ul>
    </div>
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    <span id="question_3">Others</span>
    <div id="content">
      <ul>
        <li>
          Apply to unit-linked products: review charges for existing contracts in respect on death cost and annual management charge (if reviewable), increase surrender penalties
        </li>
        <li>
          Stop selling the new business
        </li>
        <li>
          review reinsurance arrangements. make more effective use of it. Typically, this will mean retain
          more risk (assuming that reinsurance premiums include profit loading for reinsurer).
          <br>
          But, increased claims volatility will result from higher retained risk.
        </li>
        <li>
          ensure that all possible tax efficiency are exploited.
        </li>
        <li>
          develop new distribution channels that maybe less price-sensitive (direct sales force, tied agents)
        </li>
        <li>
          Invest funds held in assets with a higher expected return
          <ul>
            <li>
              Can reduce cost of future claims outgo.
            </li>
            <li>
              But, introduces greater uncertainty and mismatching risk. Also, need to consider whether any regulatory risk associated with such a mismatch.
            </li>
          </ul>
        </li>
      </ul>
    </div>
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  <p> Author: Mengke, Lyu</p>

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